Financial / Managerial Considerations in the
Electric Power Industry
What’s Behind the Switch
Lecture 6
Gene Freeman
6/27/2016
ECEN 2060 Fall 2013
1
Agenda
1. Decision Environment for Utility Companies
2. The Profit Equation & the Nature of Costs
3. Comparison of Generation Technologies & Decision
Making Dilemmas
4. Predicting Future Costs for Facilities That Have Not
Been Built Yet
a) Fixed Costs
b) Variable Costs
c) LCOE
5. Tactical Planning - Load vs. Capacity
6. Politics
7. Appendix Methods
6/27/2016
ECEN 2060 Fall 2013
2
Complex Environments Require Good Decisions
• Lots of interdependent moving parts
• Many Competing Priorities
–
–
–
–
–
–
Investor / Owner Expectations
Customer Demands
Employee Needs
Regulatory Requirements
Supplier Constraints
Social / Political Necessities
–
–
–
–
–
–
Very large installed base – much of which is aged and mortgaged
Large capital investments with long payback periods
Technology choices with vastly different economics
Expensive solutions to minimize environmental impacts
Customer needs & attitudes about power
High levels of regulatory oversight
• Economic Environment
• The whole thing is held together with $$$$
6/27/2016
ECEN 2060 Fall 2013
3
Economics Are the Basis for 99% of the Decisions
• Strategic investments
– Retirement of old / obsolete systems
– Selection of new technologies
– Capacity planning & management
• Cost optimization – Managing mix
– What sources to turn on during peak loads
– What sources to turn off during base loads
– When to buy power / when to make power
• Supply chain management
• Rate setting / negotiation
Rates
• Reporting & Governance
$
$
$
$
$
$
OPS
Supply
Profit
Chain
6/27/2016
ECEN 2060 Fall 2013
4
Overall Objectives for Utilities
• Make optimal use of existing assets
– Large fixed costs must be covered
by revenues
– Debt servicing a big priority
• Provide reliable service to customers
at an acceptable price
• Minimize operating costs
• Meet regulatory requirements
• Generate & deliver power
Collect revenues
• Pay bills
Generate profit
• Invest for the future
6/27/2016
ECEN 2060 Fall 2013
5
Some Terminology
• Watt – Unit of Power – Work / time
– Power = Current x Voltage = Watts
•
•
•
•
kW = 1,000 Watts = 103 Watts
MW = 1,000,000 Watts = 106 Watts
GW = 1,000,000,000 Watts = 109 Watts
kW hr = 1,000 Watts delivered for 1 hour
– Standard unit for billable energy delivered
– 20 - 50W incandescent bulbs (~600 lumens ea) operating
continuously for 1hr
– 71 - CFL bulbs (800 lumens ea) operating continuously for 1 hr
– 25000 red or green LED indicators operating continuously for 1
hr ( I have about 50 in my house that are on 24/7/52)
– 2 Hg Vapor street lights
– 3333 cell phone chargers plugged in with no phone to charge for
1 hr
– 1.34 lbs of carbon emissions (coal) according to 1 web site
6/27/2016
ECEN 2060 Fall 2013
6
Agenda
1. Decision Environment for Utility Companies
2. The Profit Equation & the Nature of Costs
3. Comparison of Generation Technologies & Decision
Making Dilemmas
4. Predicting Future Costs for Facilities That Have Not
Been Built Yet
a) Fixed Costs
b) Variable Costs
c) LCOE
5. Tactical Planning - Load vs. Capacity
6. Politics
7. Appendix Methods
6/27/2016
ECEN 2060 Fall 2013
7
2 Basic Ways to Look At Utility Financials
• Annualized Run Rates – e.g. $ / per year
–
–
–
–
Capital investment decisions
20 to 50 year capital life cycles
Accuracy decreases as time increases
Most estimates are discounted to today’s $
• Per Unit costs – e.g. $ / kWhr
– Allows comparison of various types of
energy sources
– Used in rate computations,
load optimization programs, et.al.
6/27/2016
ECEN 2060 Fall 2013
8
A Mid-Western Utility – A Typical Company
• IOU operating in 8 states, NSYE Traded
• Generation Capacity – 110GWhrs
–
–
–
–
13 coal plants - 7,697MW (Colo)
Largest Producer of Wind Energy Power
27 Hydroelectric plants – 500MW
Purchased Electricity
• Large amounts of Hydro from Canada
• 110MW from biomass generators in Minn.
– Model 3 unit bio-mass generation plant in Wisconsin
– 2 nuclear plants
• 4th largest transmission system in US
– 115kV, 230kV, 345kV
– 500kV line from Canadian supplier
• Solar Rebate program for customers who install them
– 10,600 systems generating 121MW
• ~12000 employees
• Also sell NG
6/27/2016
ECEN 2060 Fall 2013
9
Income Statement for a Local Utility Company
$M
Revenue
Electric
Natural Gas
Other
Expenses - Variable Costs
Electric Fuel & Purchased Electric
Natural Gas (sold)
Other COS
Expenses - Fixed Costs
Operating & Maintenance
Conservation & Demand Mgmt Expenses
Depreciation & Amortization
Taxes (non-income)
Total Expenses
Op Income
Other Income
Equity Earnings on Subsidiaries
Equity Allowances for Construction
Interest
Debt allowances for construction
Income taxes
Net Income from Continuing Ops (PAT)
Variable Cost % - Electric
Variable Cost % Natural Gas
Gross Margin % - Electric
Gross Margin % - Natural Gas
Fixed cost % Total Sales
Net Profit Margin
6/27/2016
2009
9,645
7,705
1,866
74
4,960
3,672
1,266
22
2010
10,311
8,452
1,783
76
5,204
4,011
1,163
30
2011
10,655
8,767
1,812
76
5,186
3,992
1,164
30
3,215
1,908
182
818
307
8,176
1,469
10
25
75
562
-40
371
686
3,272
2,057
24
859
332
8,691
1,620
31
30
56
577
-29
437
752
3,687
2,140
281
891
375
8,873
1,782
9
30
51
591
-28
468
841
3,772
2,176
261
926
409
8,306
1,823
6
30
63
602
-35
450
905
47.66%
67.85%
52.34%
32.15%
33.33%
7.11%
47.46%
65.23%
52.54%
34.77%
31.73%
7.29%
45.53%
64.24%
54.47%
35.76%
34.60%
7.89%
42.55%
57.32%
57.45%
42.68%
37.24%
8.94%
ECEN 2060 Fall 2013
2012
% Change
10,128
5.0%
8,517
10.5%
1,537
-17.6%
74
4,534
3,624
-1.3%
881
-30.4%
29
17.3%
14.0%
43.4%
13.2%
33.2%
1.6%
24.1%
7.1%
-12.5%
21.3%
31.9%
10
Cap Ex Forecast
Capital Expense Forecast
Electric Generation
Electric Transmission
Electric Distribution
Natural Gas
Nuclear Fuel
Msc
Total
2012
2013
2014
2015
2016
2017
Actual
Forecast Forecast Forecast Forecast Forecast
772
1025
710
550
465
570
734
1010
870
650
635
770
486
515
525
525
535
545
247
355
365
335
325
320
53
95
155
100
140
145
158
155
150
150
155
150
2450
3155
2775
2310
2255
2500
Most of the capital expenditures will be funded by a combination of debt
(borrowing from a bank) and equity (issuing stock)
Cost of capital in 2012 ~ $600M
Current Capital Platform ~ $24B
Any company’s cost of capital is highly dependent on credit worthiness and
ROI
• Sound investments
• Stable / predictable profitability
• Sustainable growth in earnings
6/27/2016
ECEN 2060 Fall 2013
11
The Profit Equation
• Operating Income (OI) = Revenue - VC - FE
Where: Revenue = Q x ASP
VC (Variable Cost) = Q x uVC
Q= quantity sold
ASP = Average Selling Price
uVC = unit Variable Cost
FE = Fixed Expenses
Salaries
Utility Costs (e.g Water, Sewer, Telecommunications
Rent / Insurance / Maintenance on Vehicles
Other fixed costs
Note: Later on we will add Interest, Depreciation, Taxes etc.
• OI= Q x (ASP - uVC) - FE
• Profit is Computed Monthly
• Aggregated Quarterly & Annually
– Quarterly earnings reports
– Annual Report
6/27/2016
ECEN 2060 Fall 2013
12
Revenue
Type
• Average Selling Price
– Total Revenue / Unit Volume
– Units sold must be similar
• Revenue =Q x ASP
Number
Civil
Residential
Commercial
Industrial
Wholesale
Total
68,510
2,940,024
419,618
1,147
75
3,429,374
Total
Total
$ / Yr
kWhrs / yr
130,538,000
1,109,000,000
2,713,575,000 25,033,000,000
2,956,077,000 35,660,000,000
1,534,728,000 27,396,000,000
687,912,000 15,781,000,000
8,450,219,000 104,979,000,000
ASP
0.1177
0.1084
0.0829
0.0560
0.0436
0.0805
Hypothetical Revenue Lines for Example Company - 2012
VC = $0.407/ kWhr
18.0000
Civil
16.0000
Residential
Total $B
14.0000
12.0000
Commercial
10.0000
8.0000
6.0000
4.0000
Combined
2.0000
Industrial
Wholesale
0.0000
0
10
20
30
40
50
60
70
80
90 100 110 120 130
GkWhrs
6/27/2016
ECEN 2060 Fall 2013
13
Variable Costs
• Per Unit Cost = $/kWhr
• Total variable cost increases as quantity sold increases
– VC total = Q x uVC
• Supplies
• Repair Parts
• Some Labor
– Purchased Power
$B
• 3 components of variable cost for utility companies
– Fuel
Variable Cost Line for Example Utility - 2012
– Ops & Maint.
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
0
10
20
30
40
50
60
70
80
90
100 110 120 130
GkWhrs
• $.0407 / KWhr in our mid-Western electric company for all energy
sources combined – 2012 data
– These do not represent costs for a new facility
6/27/2016
ECEN 2060 Fall 2013
14
Fixed Costs – General Discussion
• Fixed cost independent of
quantity sold
• Fixed Costs Include
• Salaries
• Equipment
• Utility costs
–
–
–
–
• Tools
• Supplies
• Rentals
$B
– Operations & Maintenance
Fixed Cost Line for Example Utility - 2012
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
0
10
20
30
40
50
60
70
80
90
100 110 120 130
Depreciation / Amortization
Property Tax / Insurance
Interest on debt for the facilities
Income Taxes (For Investor Owned and Merchant Utilities)
GkWhrs
• $3.540B for our example for all plants combined – 2012
data (Note NG Fixed cost backed out)
– These do not represent costs for a new facility
6/27/2016
ECEN 2060 Fall 2013
15
Total Costs = Fixed + Variable
$B
Cost Lines for Example Utility
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
0
10
20
30
40
50
60
70
80
90
100 110 120 130
GkWhrs
6/27/2016
ECEN 2060 Fall 2013
16
The Volume / Cost / Profit Macro - Model
Break Even Macro Model for Eaxmple Utility - 2012 Data
10,000,000
9,000,000
Profit @
105GkWhrs =
$701.5M
Break Even
87.6GkWhrs
Total Cost
}
Total $ ($M)
8,000,000
7,000,000
Fixed Cost
6,000,000
5,000,000
4,000,000
3,000,000
Revenue
110GkWhrs Generated
2,000,000
105GkWhrs Sold
Variable Cost
1,000,000
Where did 5GkWhrs go?
0
0
10
20
30
40
50
60
70
80
90 100 110 120 130
(GkWhrs)
•
•
ASP = $0.0805 /kWhr
VC = $0.040 / kWhr
6/27/2016
•
•
Assumes Operations & Maintenance is 30% Variable / 70% Fixed
All other expenses are fixed (85% allocated to Electric)
ECEN 2060 Fall 2013
17
Break Even Point
• Cross over point of the revenue line and the total cost
line is the break even point, i.e. profit = 0
– Profit = 0 = (ASP * Q) – (uVC * Q) - FE
– 0 = [(ASP – uVC) * Q ] - FE
– Q = FE / (ASP – uVC)
• In our example the break even volume is 87.6 GkWhrs
• Each company has its own unique breakeven point
based on its fixed costs, revenue and variable costs
• Each plant has its own break-even point
• The utility industry has a unique version of this curve –
shown in Fig 1.29 in the book
6/27/2016
ECEN 2060 Fall 2013
18
Agenda
1. Decision Environment for Utility Companies
2. The Profit Equation & the Nature of Costs
3. Comparison of Generation Technologies &
Decision Making Dilemmas
4. Predicting Future Costs for Facilities That Have Not
Been Built Yet
a) Fixed Costs
b) Variable Costs
c) LCOE
5. Tactical Planning - Load vs. Capacity
6. Politics
7. Appendix Methods
6/27/2016
ECEN 2060 Fall 2013
19
Types of Generation Facilities - Coal
P lant C harac teris tic s
T ype - C O 2 / S ox / NO x E m is s ions
Nom inal
C apac ity Heat R ate
(MW)
(B tu/kWh)
P lant C os ts (2012$)
per G W
O vernig ht
Num ber
C apital
F ixed
Variable
C os t
O &M C os t O &M C os t
($/kW)
($/kW-yr) ($/MWh) R equired
F uelC os t
C apital
for 2012
C os t ($B )
$ / kWhr
C oal - 2,244 / 13 / 6 lbs / MWhr
S ingle Unit Advanced P C
T otal C os t
$ / kWhr
$2.40
650
8,800
$3,246
$37.80
$4.47
1.54
3.246
0.0211
0.0299
Dual Unit Advanced P C
S ingle Unit Advanced P C with C C S
1,300
650
8,800
12,000
$2,934
$5,227
$31.18
$80.53
$4.47
$9.51
0.77
1.54
2.934
5.227
0.0211
0.0288
0.0291
0.0475
Dual Unit Advanced P C with C C S
1,300
12,000
$4,724
$66.43
$9.51
0.77
4.724
0.0288
0.0459
600
8,700
$4,400
$62.25
$7.22
1.67
4.400
0.0209
0.0352
1,200
520
8,700
10,700
$3,784
$6,599
$51.39
$72.83
$7.22
$8.45
0.83
3.784
0.0209
0.0340
1.92
6.599
0.0257
0.0424
S ingle Unit IG C C
Dual Unit IG C C
S ingle Unit IG C C with C C S
•
•
•
•
•
Total Ops Costs are without Interest & Taxes
PC = Pulverized Coal. Typical CF =0.85
– Pellet sized coal fed to burners to make steam which drives a steam turbine generator set
– Lowest Operating Cost , Lowest Installation Cost of coal alternatives
– Highest CO2 and particulate emissions of the major sources
– Dual Unit preferred because they share common buildings and condensate facilities
IGCC = Integrated Gasification Combined Cycle
– Coal is converted into a gas, then burned in a gas turbine to turn a generator
– Waste heat generates steam to run a steam turbine – most efficient conversion of coal to electricity
– Adds $900M to Dual PC facility construction, $2.75 per MWhr to production cost and increases fixed OH
CCS = Carbon Capture and Storage – Removes CO2 and stores it underground
– Adds $1.4B to construction for a dual units
– More than doubles operating cost and fixed OH
– Emissions from burning or conversion of coal are removed from effluent and stored
IGCC with CCS – Cleanest, but most expensive of coal options per GW
6/27/2016
ECEN 2060 Fall 2013
20
Types of Generation Facilities – Natural Gas (NG)
P lant C harac teris tic s
T ype - C O 2 / S ox / NO x E m is s ions
Nom inal
C apac ity Heat R ate
(MW)
(B tu/kWh)
P lant C os ts (2012$)
per G W
O vernig ht
Num ber
C apital
F ixed
Variable
C os t
O &M C os t O &M C os t
($/kW)
($/kW-yr) ($/MWh) R equired
F uelC os t
C apital
for 2012
C os t ($B )
$ / kWhr
Natural G as - 1,135 / .1 / 1.7 lbs / MWhr
T otal C os t
$ / kWhr
$10.44
C onventional C ombined C ycle
620
7,050
$917
$13.17
$3.60
1.61
0.917
0.0736
0.0787
Advanced C C
400
6,430
$1,023
$15.37
$3.27
2.50
1.023
0.0671
0.0722
Advanced C C with C C S
340
7,525
$2,095
$31.79
$6.78
2.94
2.095
0.0786
0.0890
85
10,850
$973
$7.34
$15.45
11.76
0.973
0.1133
0.1296
210
10
9,750
9,500
$676
$7,108
$7.04
$0.00
$10.37
$43.00
4.76
100.00
0.676
7.108
0.1018
0.1130
0.0430
C onventional C entralized T urbine
Advanced C T
F uel C ells
•
•
•
•
Total Ops Costs are without Interest & Taxes
CC = Combined Cycle. Typical CF = 0.85
– Gas turbine burns NG to turn a generator
– Waste heat generates steam to run a steam turbine
– Installation cost comparable to dual coal PC, operating cost lower than coal
– Displaced all oil fired and many coal fired plants
– Half of the CO2 emissions & 1/3 the NOx emissions compared to coal. Negligible SOx
CCS = Carbon Capture and Storage
– Adds 3.6B to construction cost per generator
– More than doubles operating cost
CT = Centralized Turbine. Typical CF < 0.20
– Used for peak generation capacity only
– Can be turned on and off quickly & efficiently
– Triple the operating cost of CCNG facilities
– 2 x more expensive than conventional CCNG
6/27/2016
ECEN 2060 Fall 2013
21
Types of Generation Facilities – Big Capital
P lant C harac teris tic s
T ype - C O 2 / S ox / NO x E m is s ions
Nom inal
C apac ity Heat R ate
(MW)
(B tu/kWh)
P lant C os ts (2012$)
per G W
O vernig ht
Num ber
C apital
F ixed
Variable
C os t
O &M C os t O &M C os t
($/kW)
($/kW-yr) ($/MWh) R equired
F uelC os t
C apital
for 2012
C os t ($B )
$ / kWhr
T otal C os t
$ / kWhr
Uranium - 0 lbs / kWhr
Dual Unit Nuclear
2,234
N/A
$5,530
$93.28
$2.14
0.45
5.530
0
0.0128
500
250
N/A
N/A
$2,936
$5,288
$14.13
$18.00
$0.00
$0.00
2.00
2.936
0
0.0016
4.00
5.288
0
0.0021
50
50
N/A
N/A
$6,243
$4,362
$132.00
$100.00
$0.00
$0.00
20.00
6.243
0
0.0151
20.00
4.362
0
0.0114
Hydroelec tric - 0 lbs / kWhr
C onventional Hydroelectric
P umped S torage
G eothermal - 0 lbs / kWhr
G eothermal – Dual F las h
G eothermal – B inary
•
•
•
•
Total Ops Cost are without interest & Taxes
Nuclear – Thermonuclear generation of Steam
– Low operating cost
– Installation per GW are comparable to coal
– Issues with spent rod waste disposal, no atmospheric emission
– Historic concerns over safety
Hydroelectric – Gravitational fall of water to turn generator
– Construction costs comparable to coal (excluding land for retention), $0.00 fuel costs
– Limited to areas where continuous flow of water is available over a suitable drop in elevation
– Permitting is difficult because of land inundation
– Issues in some watersheds over fish reproduction (e.g. Columbia River Project and salmon fisheries)
Geothermal – Recovery of earth’s core heat to generate steam
– Construction costs very high, payback on energy cost is measured in centuries
– Limited to areas with access to geothermal sources
6/27/2016
ECEN 2060 Fall 2013
22
Types of Generation Facilities – Alternative
P lant C harac teris tic s
T ype - C O 2 / S ox / NO x E m is s ions
Nom inal
C apac ity Heat R ate
(MW)
(B tu/kWh)
P lant C os ts (2012$)
per G W
O vernig ht
Num ber
C apital
F ixed
Variable
C os t
O &M C os t O &M C os t
($/kW)
($/kW-yr) ($/MWh) R equired
F uelC os t
C apital
for 2012
C os t ($B )
$ / kWhr
T otal C os t
$ / kWhr
Wind - 0 lbs / kWhr
O ns hore W ind
O ffs hore W ind
100
400
N/A
N/A
$2,213
$6,230
$39.55
$74.00
$0.00
$0.00
10.00
2.213
0
0.0045
2.50
6.230
0
0.0084
S olar T hermal
100
N/A
$5,067
$67.26
$0.00
10.00
5.067
0
0.0077
P hotovoltaic
P hotovoltaic
20
150
N/A
N/A
$4,183
$3,873
$27.75
$24.69
$0.00
$0.00
50.00
4.183
0
0.0032
6.67
3.873
0
0.0028
20
50
12,350
13,500
$8,180
$4,114
$356.07
$105.63
$17.49
$5.26
50.00
8.180
0.1359
0.1940
20.00
4.114
0.1485
0.1658
50
18,000
$8,312
$392.82
$8.75
20.00
8.312
0.04
0.0936
S olar - 0 lbs / kWhr
B iomas s - > than c oal
B iomas s C C
B iomas s B F B
Munic ipal S olid Was te > than c oal
Municipal S olid W as te
•
•
•
•
$11.00
Total Ops Cost are without interest & Taxes
Wind – Atmospheric air flow drives generator Typical CF = 0.34
– Issues with inconsistent output due to lack of adequate wind energy. Needs a storage solution
– Must be located where prevailing winds are continuous
– Capital costs are high because of relative low volumes of production
Solar – Photovoltaic generation in semiconductor film. Typical CF = 0.25
– Requires large surface areas to accumulate energy and convert to electricity
– Issues with inconsistent output due to sun cycle. Needs a storage solution
– Installation costs are very high because of low volume production
– Fuel costs $0.00
Biomass & Municipal waste – Burn organic material to generate steam. CF comparable to Coal
– Dirty and expensive to set up, Does reduce landfill contributions
6/27/2016
ECEN 2060 Fall 2013
23
Alternative Energy vs. Fossil Fuel
P lant C harac teris tic s
T ype - C O 2 / S ox / NO x E m is s ions
Nom inal
C apac ity Heat R ate
(MW)
(B tu/kWh)
P lant C os ts (2012$)
per G W
O vernig ht
Num ber
C apital
F ixed
Variable
C os t
O &M C os t O &M C os t
($/kW)
($/kW-yr) ($/MWh) R equired
F uelC os t
C apital
for 2012
C os t ($B )
$ / kWhr
C oal - 2,244 / 13 / 6 lbs / MWhr
T otal C os t
$ / kWhr
$2.40
Dual Unit Advanced P C
1,300
8,800
$2,934
$31.18
$4.47
0.77
2.934
0.0211
0.0291
Dual Unit Advanced P C with C C S
Dual Unit IG C C
1,300
1,200
12,000
8,700
$4,724
$3,784
$66.43
$51.39
$9.51
$7.22
0.77
4.724
3.784
0.0288
0.0209
0.0459
0.0340
0.83
Natural G as - 1,135 / .1 / 1.7 lbs / MWhr
$10.44
C onventional C ombined C ycle
620
7,050
$917
$13.17
$3.60
1.61
0.917
0.0736
0.0787
Advanced C C
400
6,430
$1,023
$15.37
$3.27
2.50
1.023
0.0671
0.0722
Advanced C C with C C S
340
7,525
$2,095
$31.79
$6.78
2.94
2.095
0.0786
0.0890
C onventional C entralized T urbine
Advanced C T
85
210
10,850
9,750
$973
$676
$7.34
$7.04
$15.45
$10.37
11.76
4.76
0.973
0.676
0.1133
0.1018
0.1296
0.1130
100
400
N/A
N/A
$2,213
$6,230
$39.55
$74.00
$0.00
$0.00
10.00
2.213
0
0.0045
2.50
6.230
0
0.0084
S olar T hermal
100
N/A
$5,067
$67.26
$0.00
10.00
5.067
0
0.0077
P hotovoltaic
P hotovoltaic
20
150
N/A
N/A
$4,183
$3,873
$27.75
$24.69
$0.00
$0.00
50.00
6.67
4.183
3.873
0
0
0.0032
0.0028
Wind - 0 lbs / kWhr
O ns hore W ind
O ffs hore W ind
S olar - 0 lbs / kWhr
C C S = C arbon C apture & S torage - R emove C O 2 & S tore underground
P C = P ulvariz ed C oal
NG C C = C ombined C ycle
Summarized from EIA data shown on next 4 slides
IG C C = Integrated G as s ification C ombined C ycle
C T = C entraliz ed T urbines
Total Ops Cost do not include interest or taxes and
assumes a CF of 1
6/27/2016
ECEN 2060 Fall 2013
24
Alternative Energy vs. Fossil Fuel
• Alternatives (Wind & Solar) have lowest operating costs
• However
– Irregularity of output for wind & solar also requires additional
capital investment not shown in tabes
• Work is required to make alternative sources competitive
– Solve storage issues
– Bring down costs of installation
• Coal Plants are expensive to clean up and come in very
large chunks of capacity
• NG fuel prices have come down but are subject to
market demand vs. supply pricing dynamics – this is only
a short term fix
• There are no easy (or cheap) solutions!
6/27/2016
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25
What’s Happening Now In the Industry
• CCNG & CTNG plants are replacing PC plants at a rate of 50 -100
per year
– Slightly higher overall operating cost
• NG fuel cost > Coal cost (~ $0.04 / kWhr)
– Lower Construction cost
– Lower CO2 emissions (1/2 of PC)
– Very low aerosols, SOx, NOx and Hg emissions
• But this is not a long term solution either!
– NG supply limitations will eventually drive up fuel costs
– CO2 emissions are cumulative with other natural sources
• Non-combustion alternatives will be needed eventually
– Solar – Requires a lot of surface area & storage for dark periods
– Wind – Only works when / where wind is persistent, needs storage
– Hydroelectric – Big issues with permitting, environmentalists & land
costs
– Nuclear – Big Issues with waste storage and public opinion about safety
6/27/2016
ECEN 2060 Fall 2013
26
Basic Strategic Investment Decisions
• When should a generation asset be retired?
– When Regulatory requirements for emissions
cannot be met profitably
– The age of the asset causes the plant to be
unreliable or unprofitable
– When newer technology would reduce the operating
costs such that margins ($) would improve significantly
– The book value of the asset is close to $0
• When should a new asset be added?
– Before future demand exceeds current
capacity by more than X%
– Lead time for planning, permitting, construction
& start up of a new facility is 3-5 years
– Note these criteria vary from company to company
– ROI’s must pass the company’s thresholds
• Which technologies should be added & where?
• How Big?
6/27/2016
ECEN 2060 Fall 2013
27
Capacity Addition Dilemmas
Lot Size Effects on Capacity Additions
2500000
Capacity w 1 big addition
2000000
1500000
kW
Demand
1000000
Capacity w 4 small additions
Growing
50k KWhrs
/ year
500000
0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Year
Is it better to add 1 big plant (1,000,000 kW) 10 years from now or add 4 smaller plants (250,000
kW) spaced 5 years apart?
Why?
What happens to operating cost / profit when the plant has more capacity than demand?
What happens to operating cost / profit when the plant has less capacity than demand?
6/27/2016
ECEN 2060 Fall 2013
28